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Sunday, August 5, 2012

The Market Continues to Send Mixed Messages

For the last few weeks, the market has behaved like a hand grenade: if you pulled the pin on a trade, you could make a profit if you let it go quickly -- but if you held on too long, it was liable to blow up in your face. This type of market is loved and adored by short-term and day traders, but can really wear out the swing traders (and us chartists who are trying to find something useful for swing traders!).

Over the past five weeks or so, I've outlined both the bullish and bearish alternatives, but have largely warned that both sides should stay cautious as long as the market stayed range-bound and failed to reclaim any key levels. Then, about a week ago, I suggested that the market might be getting ready to finally begin a sustained directional move. With the benefit of the latest information revealed in the week since, I'm no longer sure this is the case. I'll explain why:

Over the past week, I've largely suggested that the S&P 500 (SPX) "should" make a new high above 1391, which it's done. But the breakout is suspect, because a number of indices are lagging badly, including the Nasdaq Composite (COMPQ), Russell 2000 (RUT), and Dow Jones Transportation Average (TRAN) (charts to follow). These are not small or insignificant markets, and this suggests that even if a new bull leg is in the early stages, it still has some work to do first. If the intermediate bear view still holds water, then these other markets are actually telling the "real" story, but it's a market of mixed messages right now... which means we might be in for continued chop for the time being.

Of course, that could always change tomorrow -- but right at this moment, it looks like the bulls still aren't ready to commit; nor are the bears.

On Friday, based on everything I could gather from the charts, I proposed an ending diagonal formation for SPX. This still appears to be a reasonable theory, and Friday did "what it was supposed to" and followed my projected outlook. Below is the updated chart, though since the diagonal is still largely hypothetical at this stage, I've outlined a few things to watch to see if it continues to hold water going forward.

A diagonal does not need to follow my path perfectly to be viable, and honestly I'd be surprised if it did.

Next up is a chart of the RUT, which shows how much it's lagging SPX in performance. This tells us that certain large-cap sectors are reasonably strong, but the "risk on" trade hasn't quite come into vogue just yet.

Next is the Nasdaq (COMPQ), which is also lagging, and which is another "risk on" index. However, it's hard to view this chart as bearish. I wouldn't exactly call it overly bullish yet either -- but the Nasdaq is maintaining a key long-term breakout level, and has just broken out from the recent downtrend. More mixed messages, though on balance, this chart is slighly more bullish than bearish.

Below is an overview of six different markets, for side-by-side comparison. Note how everything rallied in unison much more solidly back at the October 2011 lows... so the charts aren't screaming "bull" yet. Again, though, it's hard to view most charts as terribly bearish, either, since everything except TRAN is maintaining short-term breakouts.

But TRAN might be a problem for bulls. TRAN is not considered to be a "risk on" index, but is much more basic to the economy and consists of companies like Fed Ex (FDX), Delta Airlines (DAL), and Union Pacific (UNP). The fact that it's lagging here sends another mixed message.

Next is a chart which is designed to elicit angry responses from brokers (only from the lazy ones, though!). It's really not terribly pertinent to the "mixed messages" discussion, except from a very long term perspective: Keep this chart in mind if you're a swing trader who's felt frustrated during the past couple months.

Finally, a very simple chart that shows another mixed message which was sent with Friday's rally. Despite the divergences discussed, it's hard to view this market as bearish after the successful back-test we just witnessed.

In conclusion, there have been bullish breakouts in some markets, but other markets are diverging badly. The broad market is sending very mixed messages, and this suggests that investors are still somewhat undecided. Barring a significant breakout/breakdown that sends the all-clear, it's probably best to continue to remain nimble. Trade safe. ﻿

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